A solo 401(k) can allow individuals who are self-employed to save more than other alternatives because they can make both a company contribution and an individual contribution. The company can make tax-deductible profit-sharing contributions of as much as about 20% of earned income before the contribution. A person can defer $13,000 this year, up to a total of $41,000 ($42,000 in 2005), not including the $3,000 allowed for those near retirement. Someone using a Simplified Employee Pension can make only an employer contribution. The result: A 50-year-old sole proprietor earning $100,000 might be able to save about $16,000 more a year with an individual 401(k).

 

Solo 401(k)s are designed generally for small businesses staffed largely by their owners, though they can include family members, provided they earn income from the business. Someone who has a 401(k) through their employer can be eligible for one, as long as they have a distinct source of income, such as freelance or consulting work. But the total the employee contributes to 401(k) plans can’t exceed $13,000 this year [2005] ($16,000 if you are 50 or older) or 100% of compensation.